Educational Articles

Internet Leaders: Then and Now

Marija Dabovic
| October 18, 2011

AOL Inc. (AOL) took its first steps in 1983 when it was established as Control Video Corporation, a small video-game-related online service. Within the next two years, the company changed its name to Quantum Computer Services and developed an instant messaging system. Too, it initiated the famous phrase “You’ve got mail,” which is what users were (and are still) told when signing on if they had new or unread email. In 1991, Quantum changed its name to America Online, and began working on key AOL components such as AOL Instant Messenger, commonly referred to as AIM.

The company delivered strong performances early on. By 1995, AOL had over 1 million subscribers and debuted AOL Germany, spreading its reach to international populations. Not surprisingly, its number of users increased to 5 million in the following year. At the same time, the company created and introduced the Buddy List, a user’s individual compilation of his or her contacts. Connecting with friends, family, and colleagues could often be accomplished through AIM. Indeed, it was not uncommon to ask someone for their “screen name,” especially since this was prior to the widespread use of cellular phones.

AOL then began a number of strategic M&A activities. Perhaps the most notable came in 2000 when it merged with Time Warner Inc. (TWX) in a record-setting $350 billion deal. The move was highly publicized, as it created one of the largest corporations in the world. The merger eventually went sour, with legal investigations into the company’s advertising operations, and in 2009, the two separated making AOL an independent company once again.

In more recent events, AOL purchased The Huffington Post, creating the AOL Huffington Post Media Group, which is a compilation of sites in an attempt to reestablish the company as a one-stop shop for news, entertainment, and other online attractions.

The acquisition came at a time when AOL was experiencing a decline in subscription revenue. Indeed, the availability of high-speed broadband is making it increasingly more likely that subscribers will drop AOL. As such, the company is in a transitional phase, moving from the 1990’s Internet provider to more of a media content firm, supported by advertising income.

Unfortunately, however, AOL’s advertising revenues are not faring so well either. In fact, this number has been on a downward trajectory. In addition, there appears to be a struggle amongst some of the company’s leaders, namely Michael Arrington of TechCrunch and Arianna Huffington. All in all, the trouble the company is facing has been reflected in the price of its stock. Indeed, these shares are currently trading over 58% lower than their 2011 high.

Yahoo! Inc. (YHOO), a rival of AOL, is experiencing different, though material issues of its own. Yahoo!’s history is a bit more simple. It was created in 1994 by Jerry Yang and David Filo, two Stanford University graduate students, and incorporated in 1995. The company issued an IPO the following year, closing at $33 a share on its first day. The stock’s price grew strongly, reaching its all time high of $475 a share in 2000, or $118.75 adjusted for splits.

In the following years, Yahoo made a series of acquisitions, purchasing companies ranging from photo service Flickr, to online job search engine HotJobs. During the same time, the company also went through a number of CEOs. In fact, the seat was held by three different people within six years.

In February 2008, Microsoft Corporation (MSFT - Free Microsoft Stock Report) made a $44.6 billion bid to purchase the company. This number translates to $31 a share, which was a 62% premium over the closing price of $19.18 on January 31, 2008. Yahoo, under CEO Jerry Yang, rejected the offer, which would have given shareholders a nice return.

At the end of 2008, Jerry Yang stepped down as chief executive officer. In the following year, Carol Bartz, got on board as Yahoo’s new CEO, a position she held until this past September. Ms. Bartz was ousted by the board, who analyzed Yahoo’s performance and came to the conclusion that it should be doing better. Revenues have been declining since 2008, suggesting that Ms. Bartz was not successful in turning the company around. Once again, the company is looking for a new leader.

Simultaneously, Yahoo is also looking for a potential buyer. In fact, several suitors have emerged over the past few weeks. This group is rumored to include a variety of entities, ranging from private equity firms, such as Silver Lake, to technology and media company News Corp. (NWS). Alibaba Group, a Chinese e-commerce company, has also shown interest in Yahoo. This deal, if executed, would be notable, considering the 40% stake Yahoo took in Alibaba six years ago.

An even more striking plan of action involves AOL and Yahoo. Indeed, there has been speculation over a possible merger between the two. The move would save the companies an aggregate of roughly $1.5 billion in costs by consolidating their data centers and various news and entertainment sites. Too, the companies have a number of shareholders in common such as Vanguard, BlackRock (BLK), and State Street (STT).

All told, these two one-time internet giants are now at a crossroads. Though their situations seem a bit different, there is a common denominator that has had a strong influence on the current state of these companies. This factor is the competition from other companies that have emerged during the course of the lives of Yahoo and AOL. The two most influential being Google Inc. (GOOG) and Facebook.

At face value, it is easy to recognize the immense popularity that both Google and Facebook have accumulated, and it is expected that some of the users of the services these companies provide have abandoned the services of AOL and Yahoo. For example, Google’s homepage is similar to that of Yahoo’s, offering direct links to personal email, current news, and financial market data. Too, both Facebook and Google Inc. offer a social networking medium and chat capabilities similar to that of AOL’s “Buddy List.”

More important than the overlapping services mentioned above is the way in which the newcomers are taking revenue away from the veterans. Both YHOO and AOL depend on advertisements to generate income. Although some of AOL’s top line comes from subscribers, the company is focusing its efforts primarily on increasing advertising income.

Google Inc. generates virtually all of its revenue from advertising, and this number has grown exponentially. At the time of its IPO in 2004, the company’s revenues totaled $19.1 million. In the most recent year, its top line came in at over $29.3 billion. This mammoth growth illustrates just how much market share Google has attained, decreasing business potential for Yahoo and AOL.

Facebook is not yet a public company, so its financial statements are not freely disclosed, although 2011 revenues are estimated to come in around $4 billion. Nonetheless, the company has over 800 million active users, operating in over 75 languages, a large audience for those who are seeking to advertise. Too, the social networking site offers a chat that is likely to distract users from the traditional AIM platform, further broadening the gap between AOL and its once devoted users.

All in all, Google and Facebook entered the market with excitement and innovation, and are now part of many everyday lives. The phrase “Google it,” has become the answer to many questions and “Facebooking” is now an extremely common form of communication. Though the success of these new companies cannot be fully blamed for the turbulent operations within AOL and Yahoo, it has likely played a part in the decrease of their popularity and taken some share of their revenues.

The question that now remains is, what will happen to AOL and Yahoo? Will AOL continue to acquire a vast variety of companies in hopes that they will congeal nicely, forming an attractive advertising platform? Will Yahoo continue to search for a leader who will save the company from further failure? Or will they find a favorable buyer? Even more interestingly, will these two struggling companies become one?

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.